The Simplified Method

Using the Simplified Method, you figure the tax free part of each monthly annuity payment by dividing your cost by the total number of expected monthly payments. This is either defined in the contract or figured on the annuitants' ages on the starting date and determined from a table.

The Simplified Method must be used if:

1. The annuity starting date is after November 18, 1996, and
2. The pension or annuity payments are from a qualified employee plan or a tax sheltered annuity, and
3. At the time the pension or annuity payments began, you were under age 75 or were entitled to fewer than 5 years of guaranteed payments.

If your pension starts after December 31, 1986, you exclude the nontaxable pension amount until the pension cost is recovered. When the pension cost is recovered, the entire pension income is taxable.

Use the Simplified Method Worksheet

For annuity starting dates beginning in 1998, you use the Simplified Method Worksheet table to figure out the tax free portion of joint and survivor annuity payments from a qualified plan. This Simplified Method Worksheet is found in the IRS Publication 575 page 38. Under this recovery method, the total number of monthly payments is based on the combined ages of the annuitants at the birthdays preceding the annuity starting date. If your annuity starting date began before 1998, the total number of payments is based on your age at that date.

The Civil Service and Railroad Retirement Board use their own version of Form 1099-R. Civil Service has added a "Taxable Annuity" box to its Form CSA 1099R for more recent retirees.

If the box is empty, of for Form RRB 1099 R, you generally must figure the tax free and taxable parts of your annuity payments using the Simplified Method.